Chapter 9 Emerging Markets

Learning Objectives To understand the special concerns that must be considered by the international manager dealing with emerging market economies. To survey the vast opportunities for trade offered by emerging market economies. To understand why economic change is difficult and requires much adjustment. To become aware that privatization offers new opportunities for international trade and investment.

Doing Business with Transition Economies The major market economies emerging out of formerly centrally planned economies are: Russia and the now independent states of the former Soviet Union. Eastern and central European nations (Albania, Bulgaria, the Czech and Slovak Republics, Hungary, Poland, and Romania).

The Trade History of Socialist Countries After 1918, Socialist states had a monopoly on foreign trade, which was concentrated in the hands of organizations specifically authorized by the state. This trade structure isolated the firms and consumers from the West and unlinked demand from supply. The result was misallocated resources, ineffective channels of distribution, and inefficiency due to lack of competition. Managers of plants were more concerned with producing the quantities stipulated by a rigid central plan than with producing products and quality desired.

Perestroika and Glasnost In the mid 1980’s, the Soviet Union developed two new political and economic programs: perestroika and glasnost Perestroika was used to fundamentally reform the Soviet Union economy by improving the overall technological and industrial base as well as the quality of life for Soviet citizens through increased availability of food, housing, and consumer goods. Glasnost was used to complement those efforts by encouraging the free exchange of ideas and discussion of problems, pluralistic participation in decision-making, and increased availability of information.

Changes after 1989 With an unexpected suddenness, the Iron Curtain disappeared, and within three years, the Communist empire ceased to exist Eastern Europe and the former Soviet Union shifted their political and economic orientations toward a market economy. Trade flows were redirected. Austerity programs were introduced, which led to a decrease in the standard of living. All of these changes ended the Cold War.

The Realities of Economic Change Many transition economies face infrastructure shortages. Capital shortages are also a major constraint. It is difficult for corporations to respond to demand because consumer knowledge is vague. Allocation mentality, or waiting for instructions from above, represent a management problem. Employee and manager commitment can be hard to find. The changes complicate managerial decision making.

The Realities of Economic Change (cont.) Given the poor market orientation in the previous business environment, managers must adapt their behavior in these areas: Problem Solving Decision Making Customer Orientation Development Team Building

Adjusting to Global Change Resistance to change should be expected in countries that experience rapid economic and political change. The established market economies of the West also must be prepared for change due to: The reorientation trade flows Job shifts Declines in employment

International Business Challenges The frequent unavailability of convertible currency makes many products out of reach for citizens of emerging market economies. Lack of protection of intellectual property rights dissuade firms from investing in emerging market economies. Attempting to source products from emerging market economies can be problematic. The quality of products can be inferior in emerging market economies.

International Business Opportunities Some transition economies have products that are unique in performance and can be successfully traded internationally. Consumer products in transition economies are gaining favor because of competitive pricing. There are substantial opportunities for technology transfer.

Reasons for State-owned Enterprises The reasons for the existence of state-owned enterprises in emerging market economies are: Increased national security Increased economic security The investment is too large for the private sector Governments rescue failing private enterprises by placing them in government ownership State-owned firms are more socially-oriented than private firms which are more profit-oriented

State-owned Enterprises and International Business The three types of activities where firms are likely to encounter state-owned enterprises: The Sourcing or Marketing Process International Competition Market Entry

Drawbacks to State-owned Enterprises Competition is restrained, which results in lower quality of goods and reduced innovation. The international competitiveness of state-owned enterprises declines, resulting in the need for government subsidies. Many government-controlled corporations are losing money because the focus is on job allocation rather than business.

Reasons for Privatization Through privatization, budgets can be reduced and more efficient services can be provided. Goods and services can be more competitive and innovative. Experience indicates that private enterprises outperform state-run companies. Privatization attracts foreign investment capital. Governments can use proceeds from privatization to help fund other pressing domestic needs.

Privatization Opportunities for International Firms Existing firms can be acquired at low cost, often with governmental support through tax exemptions, investment grants, special depreciation allowances, and low-interest credits. Since wages are low in countries where privatization takes place, there is more opportunity to build low-cost manufacturing and sourcing bases. The international firm can act as a catalyst by accelerating the pace of transferring business skills and technology and by boosting trade prospects.

The Less-developed Markets The less developed markets in the world include countries in: Africa Asia Eastern Europe Latin America the Middle East The emergence of these markets presents a great opportunity for citizens and companies alike.

The World Economic Pyramid Annual Per Capita Income Tiers World Population More than $20,000 75 to 100 million 1 1.5 to 1.75 billion $1,500 to $20,000 2 and 3 Less than $1,500 4 4 billion

Multinational Firm’s Role Multinational firms have experienced a high rate of success when entering transition economies for several reasons: They tend to enter sectors that allow high profit potential with minimal capital investments. They increase in size only after they gain experience and knowledge of the local markets. The governments in transition economies award special privileges to multinational firms. As multinational firms mature in these economies, the domestic market itself becomes a market opportunity.

World-class Competition Many economies now recognize that they must be world class competitors in order to develop businesses. Domestic firms enter into joint ventures with global firms to tap into their knowledge base and success. This can be difficult, given that domestic firms rarely have significant capital to contribute.